OECD economic policy reforms 2011 going for growth

2011

Economic Policy Reforms

Going for Growth
2011
The global recovery from the deepest recession since the Great Depression is under way, but it remains
overly dependent on macroeconomic policy stimulus and has not yet managed to significantly reduce high
and persistent unemployment in many countries. Going for Growth 2011 highlights the structural reforms
needed to restore long-term growth in the wake of the crisis. For each OECD country and, for the first time,
six key emerging economies (Brazil, China, India, Indonesia, Russia and South Africa), five reform priorities
are identified that would be most effective in delivering sustained growth over the next decade. The analysis
shows that many of these reforms could also assist much-needed fiscal consolidation and contribute to
reducing global current account imbalances.

Economic Policy Reforms

Going for Growth

The internationally comparable indicators provided here enable countries to assess their economic
performance and structural policies in a wide range of areas.

2011

In addition, this issue contains three analytical chapters covering:
• Housing policies.
• The efficiency of health care systems.
• The links between structural policies and current account imbalances.

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ISSN 1813-2715
2011 SUBSCRIPTION

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Economic Policy Reforms Going for Growth

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Economic Policy Reforms
2011
GOING FOR GROWTH


This work is published on the responsibility of the Secretary-General of the OECD. The
opinions expressed and arguments employed herein do not necessarily reflect the official
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Periodical:Economic Policy Reforms
ISSN 1813-2715 (print)
ISSN 1813-2723 (online)

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Going for Growth was launched in 2005 as a new form of structural surveillance
complementing the OECD's long-standing country and sector-specific surveys. In line with
the OECD's 1960 founding Convention, the aim is to help promote vigorous sustainable
economic growth and improve the well-being of OECD citizens.
This surveillance is based on a systematic and in-depth analysis of structural policies and
their outcomes across OECD members, relying on a set of internationally comparable and
regularly updated policy indicators with a well-established link to performance. Using these
indicators, alongside the expertise of OECD committees and staff, policy priorities and
recommendations are derived for each member and, starting from the 2011 edition, six key
non-member economies with which the OECD works closely (Brazil, China, India, Indonesia,
Russia and South Africa). From one issue to the next, Going for Growth follows up on these
recommendations and priorities evolve, not least as a result of governments taking action on
the identified policy priorities.
Underpinning this type of benchmarking is the observation that drawing lessons from
mutual success and failure is a powerful avenue for progress. While allowance should be
made for genuine differences in social preferences across OECD members, the uniqueness
of national circumstances should not serve to justify inefficient policies.
In gauging performance, the focus is on GDP per capita, productivity and employment. As
highlighted in the past and again in this issue, this leaves out some important dimensions
of well-being. For this reason, Going for Growth regularly features thematic chapters
dedicated to these other dimensions, and increasingly looks at the side effects of growthenhancing priorities on other government policy objectives.
Going for Growth is the fruit of a joint effort across a large number of OECD Departments.

www.oecd.org/economics/goingforgrowth

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

3


EDITORIAL

Editorial
The Many Dividends from Structural Reform

T

he global recovery has been underway for some time now, but it remains uneven. Emerging
market economies are growing strongly, while growth in OECD economies has been insufficient to
significantly reduce unemployment from its post-crisis peak with all of the attendant human and
social costs. Global payment imbalances are widening again. How sustainable post recession global
growth will be? Policy driven recovery has still not been fully replaced by self sustained, job rich
growth, especially in advanced economies. At the same time policy space is reaching its limits, in
both the fiscal and monetary policy domains. Monetary policies have been stretched to their limits,
and public budgets are in need of consolidation – and indeed most OECD governments are tightening
fiscal policy in 2011 and beyond. In addition, the recovery takes place against the background of
permanent scars from the recession that, while difficult to assess precisely, are associated with
output losses in most advanced economies that are likely to persist for several years.
In such a scenario structural policy reforms provide the main available policy lever to speed up
the recovery and raise global growth over the coming years, while at the same time offering
significant contribution to global rebalancing and fiscal consolidation, as discussed in Chapter 1 of
this year’s edition. Financial markets are also doing a better job at pricing longer-term economic
prospects – and therefore the effects of reforms (or lack thereof) – in bond yields now than in the past,
further strengthening the case for action. Although more needs to be done to address key issues such

as systemic risk or non-bank financial institutions, financial regulation reform is on its way, with
capital, liquidity and leverage ratios for banks due to be raised or introduced across the OECD.
Efforts need to be stepped up in other areas, where structural reforms have been rather modest since
the start of the crisis.
Structural policy reforms have gained prominence in the G20 context since the Mutual
Assessment Process was set up at the 2009 G20 summit in Pittsburgh. The OECD has relied on
Going for Growth to contribute to assessing the policy commitments made by G20 countries and
identifying further reforms to improve global outcomes. Indeed this new edition of Going for
Growth identifies five key priorities to boost long-term growth for each individual OECD country –
including Chile, Estonia, Israel and Slovenia, which joined the organisation in 2010 – and, for the
first time, for key emerging countries with which the OECD works closely, namely Brazil, Russia,
China, India, Indonesia and South Africa – the so-called BRIICS. These recommendations provide
readily-available benchmarks against which domestic reform plans can be, and indeed have been
assessed.
For OECD countries, a number of these Going for Growth recommendations could deliver
much-needed short-term growth benefits, such as reductions in entry barriers in sectors with strong
immediate job-creation potential like retail trade or liberal professions. Many priorities would also
alleviate risks that low current employment levels become permanent, such as reforms of social

4

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011


THE MANY DIVIDENDS FROM STRUCTURAL REFORM

transfer programmes and activation policies. Some policies that have not traditionally featured high
on the Going for Growth agenda, such as work-sharing arrangements, cushioned unemployment
and helped workers stay in contact with the labour market during the recession. New OECD analysis
will have to draw the full policy lessons from these experiences. Other labour market policy responses

to the crisis, such as extensions in the coverage of unemployment benefits, helped to mitigate
hardship on workers and could usefully stay in place. Some policy responses, such as extended
duration of benefits, have also provided necessary protection during the recession and its aftermath
but will in many cases have to be rolled back at a pace consistent with improving labour demand.
More generally, Going for Growth features a wealth of recommendations upon which OECD
governments can draw to strengthen the job content of the ongoing recovery. For the BRIICS, Going
for Growth priorities aim primarily at speeding up or maintaining ongoing convergence to OECD
living standards, and include inter alia strengthening education systems, relaxing stringent product
market regulations and addressing the more specific challenges of labour market informality and –
in some cases – the quality of governance and legal systems.
Many of the structural reform recommendations we make in this edition of Going for Growth
could deliver double and even triple dividends in the current economic situation. They would
stimulate growth, which is their stated goal. They could also assist ongoing fiscal consolidation. This
is especially true of labour market reforms that would boost employment levels, as well as of costsaving public sector reforms. For instance, in a special chapter, we report new OECD analysis which
points to potential public spending savings from improving the efficiency of health care systems of
almost 2% of GDP on average across OECD countries. Furthermore, some of the structural reform
recommendations to individual OECD and non-OECD countries could contribute to reducing global
current account imbalances. Another special chapter on this issue suggests that a package of fiscal
consolidation and structural reforms may reduce global imbalances by about a third.
While reforms can help address the policy challenges of the post-crisis world, they are also
needed to ensure that past mistakes are not repeated and the risk of future crises is dramatically
reduced. This requires enhancing not only financial market regulation but also the functioning of
housing markets, where misguided policy interventions have magnified the crisis. In that regard, the
main findings from our special chapter are clear: there is much room for housing market reform in
many OECD countries, and better housing policies could deliver more efficient and equitable housing
outcomes, increase geographical mobility and improve macroeconomic stability going forward. It is
not too late to fix them.

Pier Carlo Padoan
Deputy Secretray-General and

Chief Economist, OECD

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

5



TABLE OF CONTENTS

Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

Part I

Structural Policy Priorities
Chapter 1.

An Overview of Going for Growth Priorities in 2011 . . . . . . . . . . . . . . . . . . .

17

Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18

Growth performance in OECD and BRIICS countries . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy reforms in the OECD and the BRIICS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy priorities to improve labour productivity performance . . . . . . . . . . . . . . . . . .
Policies to enhance labour utilisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The contribution of structural reforms to fiscal sustainability. . . . . . . . . . . . . . . . . .
Effects of structural reforms on current account imbalances. . . . . . . . . . . . . . . . . . .

23
25
28
33
37
44

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49

Annex 1.A1. How Policy Priorities are Chosen for Going for Growth . . . . . . . . . . . . .

52

Annex 1.A2. Structural Policy Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54

Annex 1.A3. Incorporating Household Production Into International
Comparisons of Material Well-Being . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

Chapter 2.

Country Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69

Chapter 3.

Structural Policies Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Part II

Thematic Studies
Chapter 4.

Housing and the Economy: Policies for Renovation. . . . . . . . . . . . . . . . . . . . 181

Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Housing policies and recent housing market developments . . . . . . . . . . . . . . . . . . .
Housing policies, residential mobility and labour market dynamism. . . . . . . . . . . .
Efficient and equitable policy interventions in housing markets. . . . . . . . . . . . . . . .

183
185
189
194

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Chapter 5.

Tackling Current Account Imbalances: Is there a Role
for Structural Policies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Introduction: recent trends in current account imbalances . . . . . . . . . . . . . . . . . . . . 207
ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

7


TABLE OF CONTENTS

How do structural policy reforms influence saving and investment? . . . . . . . . . . . . 209
How far can fiscal tightening and structural reforms contribute
to reduce global imbalances? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Chapter 6.

A New Look at OECD Health Care Systems: Typology, Efficiency
and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trends in health care outcomes and spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency gains could be large and reaping them would support
fiscal consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A new typology of health care systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

There is no superior health care system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key policy messages for improving health system efficiency. . . . . . . . . . . . . . . . . . .

222
223
227
229
230
234

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236

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ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

ISO Codes
The codes for country names and currencies used in this volume are those attributed
to them by the International Organization for Standardization (ISO).

Country code

Country name

Currency code

AUS

Australia

AUD

AUT

Austria

EUR

BEL

Belgium

EUR

BRA

Brazil

BRL

CAN

Canada

CAD

CHE

Switzerland

CHF

CHL

Chile

CLP

CHN

China

CNY

CZE

Czech Republic

CZK

DEU

Germany

EUR

DNK

Denmark

DKK

ESP

Spain

EUR

EST

Estonia

EUR

FIN

Finland

EUR

FRA

France

EUR

GBR

United Kingdom

GBP

GRC

Greece

EUR

HUN

Hungary

HUF

IDN

Indonesia

IDR

IND

India

INR

IRL

Ireland

EUR
ISK

ISL

Iceland

ISR

Israel

ILS

ITA

Italy

EUR

JPN

Japan

JPY

KOR

Republic of Korea

KRW

LUX

Luxembourg

EUR

MEX

Mexico

MXN

NLD

Netherlands

EUR

NOR

Norway

NOK
NZD

NZL

New Zealand

POL

Poland

PLN

PRT

Portugal

EUR

RUS

Russia

RUB

SVK

Slovak Republic

SKK

SVN

Slovenia

EUR

SWE

Sweden

SEK

TUR

Turkey

TRL

USA

United States

UDS

ZAF

South Africa

ZAR

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

9



Economic Policy Reforms 2011: Going for Growth
Going for Growth
© OECD 2011

Executive Summary

T

he global recovery from the deepest recession since the Great Depression has been
underway for some time now, but it remains overly dependent on macroeconomic policy
stimulus and has so far been insufficient to address high and persistent unemployment in
many countries. With fiscal stimulus bound to be gradually withdrawn to address
unsustainable public debt dynamics and little if any further support to be expected from
monetary policy, the main challenge facing OECD governments today is turning a policydriven recovery into self-sustained growth. Speeding up the structural reform process,
which outside the financial regulation area has slowed during the global recession, could
make a decisive contribution in this regard. In a context of crisis recovery, priority may be

given to reforms that are most conducive to short-term growth and help the unemployed
and those outside the labour force to remain in contact with the labour market.
This new edition of Going for Growth identifies for each OECD country and, for the first
time, for key emerging economies (Brazil, China, India, Indonesia, Russia and South Africa,
the so-called BRIICS), five reform priorities that would be most effective in delivering
sustained growth over the next decade. These recommendations are determined based on
a mapping between the performance shortfalls – measured by labour productivity and
labour utilisation gaps vis-à-vis best performers – and policy weaknesses of each individual
country. The main conclusions from this priority-setting exercise, which are summed up in
an overview chapter (Chapter 1) and described in greater detail in individual country
notes (Chapter 2) are as follows:
●

Higher income OECD countries face a range of policy challenges and can roughly be
broken down into two groups. The first group consists primarily of continental European
countries, which need to raise labour utilisation. In consequence, improving the design
of benefit systems, addressing labour market dualism through job protection reform and
shifting the tax burden away from labour are common recommendations, although
product market reforms also feature prominently. The remaining relatively wealthy
OECD countries face a more balanced set of challenges, with a greater focus on
labour productivity – especially for the Asian member countries – and with reforms of
network sector regulation, FDI restrictions, tax structure and public sectors frequently
recommended.

●

Lower income OECD countries – including Chile, Estonia, Israel and Slovenia that joined
the OECD in 2010 – and the BRIICS face far more challenges related to their education
systems and product market regulation. Reforms in these areas are aimed at enhancing
productivity. Labour informality also raises specific policy challenges in these countries.

In many cases, the nature of policy priorities for the BRIICS is similar in content to that
for low-income OECD countries, though the amount of needed reform is typically greater
in the BRIICS. Recommendations for the BRIICS and some lower-income OECD countries

11


EXECUTIVE SUMMARY

also include in several cases reforms of legal systems and contract enforcement as well
as improvements in governance systems that would address corruption.
●

Reforms that would deliver quick income and job gains come at a premium in post-crisis
circumstances. Among the identified policy priorities, such reforms include lower
barriers to competition (e.g. in retail trade or liberal professions), fewer administrative
burdens on business and removal of barriers to foreign direct investment. Some of the
identified priorities could also go a long way towards preventing high unemployment
from becoming permanent, another important concern in the current environment.
Many of the labour market policy responses to the crisis – such as the scaling-up of
short-time work schemes or extensions in the length and coverage of unemployment
benefits – helped dampen the unemployment impact of the recession and mitigated
hardship on workers. As the economic conditions evolve, new policy initiatives could
help strengthen the job content of the recovery. Such reforms include increased
spending on and reform of active labour market policies, reduced labour market dualism
through job protection reform and improved design of social transfer programmes.

●

The current economic situation has ambiguous implications for the ability of

governments to undertake reforms, with the post-crisis context making their necessity
more apparent but the weaker fiscal positions in many countries possibly being an
obstacle. Against this background, it is essential to ensure that reforms are consistent
with the pressing need for fiscal consolidation.

●

Structural reforms are mainly aimed at enhancing long-term income levels but could
also yield important co-benefits for fiscal balances. For example, reforms that boost
employment levels are likely to be helpful to fiscal consolidation. Unsustainable public
finances have also made many other types of structural reforms more urgent. In
particular, improvements in tax systems, or education and health care efficiency gains
could ease fiscal deficits.

Growth-enhancing structural reforms can also have beneficial knock-on effects on
current account imbalances, as examined in detail in Chapter 5. Despite some narrowing
during the crisis, global imbalances are still wide in both OECD and non-OECD countries and
are likely to remain so in the absence of policy action. While structural reforms are not
generally designed to address global imbalances, they can affect current accounts by
influencing households’ and firms’ saving and investment decisions, as well as by altering
public saving and investment. New empirical analysis presented in this chapter suggests that
a number of structural reforms that are desirable per se could also reduce global imbalances by
narrowing the gaps between domestic saving and investment in several major economic areas:

12

●

Developing social welfare systems in China and other Asian economies would fulfil an
important social goal, and as a side-effect would reduce the need for precautionary

saving, thus curbing the large current account surpluses of some of these countries.

●

Pension reforms that increase the age of retirement would boost income levels while
also helping to reduce saving and current account surpluses (but raise deficits in
external deficit countries).

●

Product market reforms in network industries, retail trade or professional services could
encourage capital spending and thereby reduce current account surpluses in countries
such as Japan and Germany.

●

Removal of policy distortions that encourage consumption, such as tax deductibility of
interest payments on mortgages in the absence of taxation of imputed rent, could help
ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011


EXECUTIVE SUMMARY

increase household saving and reduce external deficits in a number of countries, not
least the United States, though implementation would have to await greater stabilisation
of the economy.
●

Financial market reforms that increase the sophistication and depth of financial
markets could relax borrowing constraints in emerging economies and thereby boost

consumption and investment, thus helping to reduce the current account surpluses
observed in some of them. Such reforms need to be accompanied by appropriate
prudential controls.

●

Overall, a combination of fiscal tightening in OECD countries, product market reforms in
Germany and Japan, and increased public health spending (by 2 percentage points of
GDP) and financial market liberalisation in China could reduce the size of global
imbalances by about one-third.

This issue of Going for Growth contains a special chapter on housing (Chapter 4), an
area where misguided policies contributed to trigger the recent crisis and could now slow
down labour mobility and the job recovery. The chapter presents new housing market
policy indicators and OECD empirical analysis, with the following main findings:
●

Innovations in mortgage markets should be coupled with appropriate regulatory
oversight and prudent banking regulations. Financial liberalisation and mortgage
innovations have boosted the access to housing of previously credit-constrained
households, but regulatory reforms in mortgage markets may also be behind noticeable
increases in house prices – by an average of 30% in OECD countries between the
early 1980s and the mid-2000s – and in house price volatility.

●

Housing supply could be made more responsive to demand in many OECD countries, for
example by streamlining cumbersome construction licensing procedures. This would
help to avoid excessive volatility in house prices. At the same time, greater
responsiveness may also translate into more volatile residential investment unless

volatility of demand can be curbed.

●

Housing policies can facilitate residential mobility, allowing a better match of workers
with jobs and thereby helping the labour market recover from the recent crisis. Reducing
the high costs involved with buying a residence would improve access to credit and
housing supply responsiveness. It could also enhance residential mobility, as would
some easing of relatively strict rent controls and tenant-landlord regulations.

●

Housing policies should be designed to be efficient and equitable. Tax distortions should
be removed by taxing housing and alternative investments in the same way. Provided they
are carefully designed, targeted social housing systems can achieve their goals at least
cost, and well-designed portable housing allowances may be preferable to the direct
provision of social housing as they do not seem to directly hinder residential mobility.

Last but not least, this year’s issue of Going for Growth features a chapter on health care
(Chapter 6), a key contributor to individual well-being and an important driver of long-term
economic growth. The OECD has assembled new cross-country comparative data on health
policies and health care system efficiency, which show that there is room in all countries
surveyed to improve the effectiveness of their public health care spending:
●

On average across the OECD, life expectancy at birth could be raised by more than two
years, while holding health care spending steady, if every country were to become as
efficient as the best performers.

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011

13


EXECUTIVE SUMMARY

14

●

For more than one-third of countries, better efficiency could improve life expectancy as
much in the ten years to 2017 as in the previous ten years, while keeping health care
spending constant.

●

Alternatively, improving the efficiency of health care systems could result in large public
spending savings approaching 2% of GDP on average in the OECD.

●

There is no single type of health care system that performs systematically better in
delivering cost-effective health care. It may thus be less the type of system that matters
but rather how it is managed. Policymakers should aim for coherence in policy settings
by adopting best practices from the different health care systems and tailor them to suit
their own circumstances. Nevertheless, the international comparison highlights a
number of sources of potential efficiency gains, such as from improving the coordination
of the bodies involved in health care management, strengthening gate-keeping,
increasing out-of-pocket payments, enhancing information on quality and prices,
reforming provider payment schemes or adjusting regulations concerning hospital

workforce and equipment.

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011


PART I

Structural Policy Priorities

ECONOMIC POLICY REFORMS 2011: GOING FOR GROWTH © OECD 2011



Economic Policy Reforms 2011
Going for Growth
© OECD 2011

PART I

Chapter 1

An Overview
of Going for Growth Priorities
in 2011

This initial chapter of Going for Growth identifies five structural reform priorities for
each OECD country, for the European Union as a whole, and for the BRIICS – Brazil,
China, India, Indonesia, Russia and South Africa. The recommendations are aimed
at addressing variations in labour productivity and labour use across these
countries. Moderate and high income (mainly European) OECD countries need to

improve their labour use mainly by reforming their benefit and job protection
systems and labour taxes. The relatively wealthy Asian member countries face a
more balanced set of challenges, with a greater focus on labour productivity. The
reform challenges for lower income OECD countries and the BRIICS relate to their
education systems and product market regulation, as well as labour informality.
The chapter also reports the number of reform priorities that would directly and
quickly improve the fiscal balance, and also estimates for most OECD countries the
potential cost savings that could be reaped by implementing best practice in their
national education and health care systems. It turns out that implementing many of
the Going for Growth priorities could not only enhance living standards but also
contribute to more balanced fiscal positions, as well as to lower global current
account imbalances.

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AN OVERVIEW OF GOING FOR GROWTH PRIORITIES IN 2011

Summary and conclusions
Going for Growth reports have been published by the OECD every year since 2005. The
Going for Growth analysis identifies five structural reform priorities for each OECD country
and for the European Union (EU) as a whole.1 This seventh edition of Going for Growth has
been expanded to cover the four new member countries that joined the OECD during 2010,
namely Chile, Estonia, Israel2 and Slovenia, as well the BRIICS – Brazil, China, India,
Indonesia, Russia and South Africa – key non-member countries with which the OECD
works closely.3 The Going for Growth process provides a tool for governments to reflect on
“structural” policy reforms that affect their residents’ long-term living standards.
Structural policy reforms are central to the mission of the OECD, and the Going for Growth

analysis has been used in the Mutual Assessment Process of the G20 since the Pittsburgh
Summit. Since policy recommendations are only reconsidered or set every other year
(in odd years), this is the fourth time that a full set of recommendations has been made
for OECD member countries since the first edition of Going for Growth (OECD, 2005) and
the first time it has been made systematically for the BRIICS. The methodology used
identifies policy recommendations based on their ability to improve long-term material
living standards. The reference performance measure in this regard is gross domestic
product (GDP) per capita, given its contemporaneous availability and relatively
broad coverage despite its potential drawbacks. 4 Some measures that extend
GDP numbers to non-market production, and thereby may come closer to indicators of
well-being, are explored in Annex 1.A3.5 Recognising that policy reforms often pursue
multiple objectives rather than just income growth, this chapter also looks at the sideeffects of structural policy recommendations on two other “burning” policy objectives,
namely achieving fiscal sustainability and reducing current account imbalances (see also
Chapter 5).
The crisis is writ large in this year’s Going for Growth, vividly demonstrating the
urgency of reforms in the financial sector for restoring stability and protecting living
standards over the long-term (see Box 1.1).6 In a context of crisis recovery, priority may be
given to reforms that are most conducive to short-term growth and job gains, such as
reducing entry barrier regulation (e.g. in retail trade or liberal professions), administrative
burdens on business and international barriers that restrict foreign direct investment (FDI).
The dramatic effects of the crisis on economies globally has made many previouslyidentified structural policy priorities even more urgent – particularly those that
would allow countries’ slack labour resources to remain in contact with the labour market.
These include increasing spending on and reforming active labour market policies,
reducing labour market dualism through job protection reforms or making social transfer
programmes more conducive to employment. All these labour and product market
reforms could help to reduce the extent of hysteresis, the process whereby jobless workers
end up being unable to seek and find employment.

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I.1. AN OVERVIEW OF GOING FOR GROWTH PRIORITIES IN 2011

Main findings from the chapter include:
●

Moderate and high income OECD countries face a range of policy challenges and can
roughly be broken down into two groups. The first group consists primarily of
continental European countries, which need to raise labour utilisation, and where
reforms of benefit systems, job protection and labour taxes are common
recommendations, although product market reforms also feature prominently. The
remaining relatively wealthy OECD countries face a more balanced set of challenges,
with a greater focus on labour productivity – especially for the Asian member countries –
and with reforms of network sector regulation, FDI restrictions, tax structure and public
sectors frequently recommended.

●

Lower income OECD countries – including the new members – and the BRIICS face far
more challenges related to their education systems and product market regulation,
reforms of which are aimed at enhancing productivity levels. Labour informality also
raises policy issues in these countries. In many cases, the nature of policy priorities for
the BRIICS is similar in content to that for low-income OECD countries, though the
amount of needed reform is typically greater in the BRIICS. Recommendations for the
BRIICS and some lower income OECD countries also include in several cases reforms of
legal systems and contract enforcement as well as improvements in governance systems
that would address corruption.

●

The current economic situation has ambiguous implications for the ability of governments
to undertake reforms, with the post-crisis context making their necessity more apparent but
the deteriorated fiscal positions in many countries possibly being an obstacle. Against this
background, it is essential to ensure that reforms are consistent with the pressing need for
fiscal consolidation. The current context of slack resource use would also favour
implementing first those reforms that are known to bring stronger short-term gains, such as
the removal of various barriers to competition.

●

Structural reforms are mainly aimed at enhancing long-term income levels but could
also yield important co-benefits for fiscal balances. For example, reforms that boost
sustainable employment levels are likely to be most helpful to fiscal consolidation. The
urgency of many other types of structural reforms has also increased. In particular,
improvements in tax systems, or education and health care efficiency gains could ease
fiscal deficits (see Chapter 6 on health).

●

Structural reforms can also have important and beneficial knock-on effects on current
account imbalances. Such imbalances may be affected more by some types of structural
reforms than others. In this chapter, conclusions are drawn regarding different types of
growth and welfare-enhancing structural reforms that would also help reduce savinginvestment imbalances, depending on whether a country is in fiscal surplus or deficit,
and whether it has an external surplus or deficit. For instance, in economies
characterised by current account surpluses and fiscal deficits, easing product market
regulations in sheltered sectors would not only boost growth but could also contribute to
reduce current account surpluses by increasing investment, and to some extent help
consolidate public finances; and in dual surplus countries with weak social protection, a

strengthening of social benefits would enhance welfare by reducing the risk of hardship
and could lower both saving surpluses (see Chapter 5 on current account imbalances).

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AN OVERVIEW OF GOING FOR GROWTH PRIORITIES IN 2011

Box 1.1. Financial market reform
The recent financial crisis and its subsequent severe impact on growth and employment
have been a forceful reminder of the vital role of prudential regulation in financial markets
for helping to preserve overall economic stability. Well-functioning financial sectors not
only reduce the cost of producing and trading goods and services but also reduce the risks
of instability. And given that financial crises generate long-lasting output losses (Furceri
and Mourougane, 2009; Cerra and Saxena, 2008), enhanced stability could also contribute
to higher long-term living standards. At the same time, when evaluating the current
proposals and actions to strengthen prudential regulation frameworks, attention needs to
be paid to preserving the well-established benefits from financial market competition.
Competition matters for efficient financial intermediation, and for the pricing and quality
of financial products. It can also facilitate access of firms and households to external
financing and financial services, with potentially far-reaching consequences for economic
growth and living standards. Fortunately, however, previous OECD analysis finds only
limited trade-offs between stability and competition, and even suggests that stronger
supervisors could go along with more competitive banking systems (OECD, 2010a,
Chapter 6). Similarly, regulatory reform would have to strike the right balance between
stability on the one hand and the cost of capital on the other. Indeed, strengthening

prudential regulation might raise the long-term cost of capital with permanent adverse
effects on capital accumulation and income levels. For instance, a 1 percentage point
increase in core capital requirements may lead to a rise in the lending spread – the spread
between bank lending and borrowing rates – by about 16 basis points, ceteris paribus
(MAG, 2010). If reform were to raise the cost of capital in proportion with the share of bank
lending in the external financing of non-financial businesses, Cournede’s (2010) estimates
would suggest a negative impact on potential output in the order of 0.2% in the
United States and 0.6% in the euro area (assuming an offsetting monetary policy response).
However, the aforementioned calculations omit the gains from the new capital framework,
which include the reduced likelihood and cost of financial crises and improvements in the
quality of capital allocation across the economy. These effects have been estimated to
more than offset any gross costs of the new regulations, by a wide margin (BCBS, 2010).
For the BRIICS, the challenges are somewhat different. Financial markets are typically much
shallower than in most OECD countries, implying low levels of financial inclusion and a more
limited role for financial intermediation in capital allocation. To some extent, this reflects
more stringent regulation, in particular larger barriers to entry, and higher state ownership.
International evidence suggests that high state-ownership of banks tends to depress financial
sector development, with negative implications for long term living standards, especially for
countries with less developed financial markets (see Levine et. al., 2005).
Together with actions by individual countries and the EU, a comprehensive regulatory
reform is being discussed under the auspices of the G20 in recognition of the need for
internationally co-ordinated rules to strengthen financial stability, in particular by
reducing opportunities for regulatory arbitrage. One vital component of such a regulatory
regime has been agreed in general principles, in the form of the Basel III agreement.
This agreement effectively triples the size of capital reserves that banks must hold against
loses over the period 2011-18, by raising the Tier 1 capital ratio from 2% to 4.5% of
risk-weighted assets, and adding a further 2.5% buffer. By strengthening global capital
and liquidity regulations, banks should have larger buffers to cushion downturns. These
new requirements will be phased in gradually, and US and EU banks already meet them,

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Box 1.1. Financial market reform (cont.)
although they may want to keep a discretionary buffer above the regulatory mimima. As a
result, any adverse impacts on growth over the coming years are likely to be very small,
though they could reach between 0.1 and 0.6 percentage points of GDP growth per annum
for Japan depending on the extent of credit-supply effects (based on MAG, 2010).
While many other details of the new financial sector reforms are still to be determined,
broad consensus has been achieved on a number of principles beyond the strengthening of
capital requirements (also see OECD, 2010b; 2010c; OECD, 2010d):
●

Design macro-prudential policy so as to mitigate procyclical build-up of systemic risk
and help alleviating the accumulation of credit-driven asset price bubbles. Develop tools
to reduce the pro-cyclicality of the financial system such as contingent capital buffers
with capital surcharges being applied on top of prevailing micro- prudential capital
ratios, dynamic loss provisioning, or risk weights that are a function of aggregate
borrowers’ leverage. Establish robust institutions for macro-prudential regulation, with
adequate resources and access to information to develop early warning and systemic
assessment tools.

●

Reduce moral hazard posed by systemically-important institutions and the associated
economic damage. Options for addressing the “too-big-to-fail” problem being discussed

include: targeted (or progressive) capital, leverage, and liquidity requirements; improved
supervisory approaches; simplification of firm structures; strengthened national and
cross-border resolution frameworks, including the development of “living wills” for
major cross-border firms (see below); and changes to financial infrastructure that
reduce contagion risks.

●

Impose a maximum leverage ratio applicable to all types of assets. Progress on a binding
standard for the leverage ratio has been hindered by a lack of international convergence
in accounting standards on ending the netting of derivative positions. This lack of
convergence also means that new, tighter capital requirements may have different
degrees of effectiveness among countries, and, in conjunction with the risk weighting
approach, entails incentives for shifting risk outside the banking system.

●

Introduce cross-border crisis management mechanisms. This can be achieved by ensuring
that: i) national authorities have an effective toolkit for bank resolution, harmonised as far
as possible; ii) all systematically cross-border institutions have functioning stability
groups, supported by regularly updated living wills; iii) burden-sharing agreements
enshrined in national laws exist to limit ring fencing between countries.

●

Reform non-bank financial institutions. There is the risk that tightening of bank
regulation will encourage the shifting of risk to other parts of the financial sector. It is
particularly important to ensure that insurance and pension fund regulations prevent
build-up of systemic risk.

●

Implement sound compensation practices at large financial institutions to ensure that
they structure their compensation schemes in a way that does not encourage excessive
risk taking.

●

Strengthen accounting standards. The International and US Financial Accounting
Standards Boards (IASB and FASB) have been considering approaches to improve
and simplify accounting for financial instruments, provisioning and impairment
recognition, and are converging, albeit slowly.

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AN OVERVIEW OF GOING FOR GROWTH PRIORITIES IN 2011

Box 1.1. Financial market reform (cont.)
In the OECD, individual countries and jurisdictions have taken initiatives to reform financial
regulation to tackle the failures that led to the financial and economic crisis. Measures to
strengthen framework conditions in financial markets have nevertheless proceeded at
different speeds across countries, advancing faster in the United States. In particular:
●

In the United States, the financial reform legislation enacted in July 2010 establishes a

consumer financial protection entity, creates a systemic risk regulator (the Financial
Stability Oversight Council), gives regulatory bodies the authority to determine which
derivatives should be cleared through centralised clearing houses, creates a banking
liquidation authority and a pre-funded liquidation fund, and bans banks from using their
regulatory capital to finance some categories of risky investments (the “Volcker Rule”), in
particular requesting banks to spin off part of their proprietary trading desks.

●

In the European Union (EU), the authorities have decided to establish a macro prudential
oversight body (the European Systemic Risk Board), and three European supervisory
authorities (covering banking, insurance and pensions, and securities respectively) to set
common technical standards and ensure efficient and harmonised (cross-border)
supervision. Authorities have also advanced in harmonising and simplifying deposit
guarantee schemes (increasing the overall level of protection), the heterogeneity of which
was disruptive for financial stability during the crisis. They also intend to put in place a
banking crisis management mechanism to deal effectively with the failure of European
banks (including through the establishment of colleges of supervisors for large crossborder groups). As well, the European Commission has launched a consultation document
to harmonise rules and tools relating to short selling across member states.

●

At the national level, some EU countries have taken measures on their own. Some countries
have imposed (France, Germany and Sweden) a levy on banks to reduce taxpayer costs of
future bank failures and financial crises. Germany imposed a ban on naked short-selling of
certain types of securities. In the United Kingdom, the authorities undertook in the second
half of 2010 a three-month consultation period on a reform that intends to place both firmspecific and macro-prudential regulation (through new powers) under the auspices of the
Bank of England. The new regulatory system is not expected to be in place before 2012 to
allow the financial sector to adjust. Moreover, an independent commission has been given
one year to report on the issue of separating retail and investment banking and the need to

break-up large banks. A levy on banks will be implemented starting from January 2011 to
encourage banks to move away from risky funding. Outside the EU, Switzerland imposed
tighter liquidity and solvency requirements on the country’s two biggest banks, including a
leverage ratio and a capital buffer that varies over the profit cycle.

Areas where international coordination still needs to advance further include the regulation
of the over-the-counter derivatives market and accounting standards. Regarding the former, it
is important that authorities across both sides of the Atlantic agree on a common set of
derivatives that should be traded through central clearing houses in order to avoid shopping
for the most favourable set of rules. On the latter, it is important not to lose momentum in
converging on global high quality financial reporting standards in spite of the postponement
from June to end-2011 of the deadline for convergence fixed by the G20. Finally, international
coordination of prudential supervision is particularly important for countries in a monetary
union. Upgrading regulation and supervision to reduce risk in the euro area calls for an
effective system of cross-border supervision and an integrated crisis management framework
to reduce moral hazard.

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I.1. AN OVERVIEW OF GOING FOR GROWTH PRIORITIES IN 2011

This chapter first gives an overview of economic performance and looks at variations
in labour productivity and labour resources use across the OECD countries and the BRIICS,
in order to understand the relative areas of performance weakness by country. It then
discusses the general orientation and focus of the policy recommendations that result
from mapping performance weaknesses to policy deficiencies for each individual country.
In the final parts of the chapter, the implications of growth-enhancing structural reforms

for fiscal challenges and current account imbalances are addressed.

Growth performance in OECD and BRIICS countries
Examining both OECD and BRIICS countries’ growth rates over the past decade
compared with their income level a decade earlier (Figure 1.1) reveals that there has been
some convergence in income levels. There were a number of exceptions, however, as
higher relative levels were maintained by Luxembourg, Norway and to a lesser extent the
United States, and some OECD countries including Italy, Mexico and Portugal had belowaverage growth rates in spite of starting at lower income levels. Among the BRIICS, the
most rapid convergence is observed for China, India and Russia, while it has been weakest
for Brazil and South Africa.

Figure 1.1. GDP per capita levels and growth rates1
Average growth rate 1999-2009, per cent
10
China
Weighted OECD average

8

6

Russia

India

Slovak Republic

Estonia

4

Korea
Poland
Czech Republic

Indonesia

Greece

Chile
South Africa
Brazil
Weighted OECD average

2

Turkey

Hungary

Mexico

5

Slovenia
Israel

0
0

United Kingdom

10

New Zealand
Portugal

15

20

Sweden Iceland
Finland
Spain
EU
France
Japan

25

Ireland
Norway³
Austria
Australia

Denmark
Italy
Belgium Germany

30

Netherlands

Luxembourg²

United States
Canada Switzerland

35
40
45
50
Level, thousands of US dollars in 1999, per cent

1. GDP per capita, in constant 2005 purchasing power parities (PPPs).
2. In the case of Luxembourg, the population is augmented by the number of cross-border workers in order to take
into account their contribution to GDP.
3. Data refer to GDP for mainland Norway which excludes petroleum production and shipping. While total GDP
overestimates the sustainable income potential, mainland GDP slightly underestimates it since returns on the
financial assets held by the petroleum fund abroad are not included.
Source: OECD (2010), National Accounts Database and OECD (2010), OECD Economic Outlook No. 88: Statistics and Projections
Database.
1 2 />
Decomposition of GDP per capita gaps
Gaps in GDP per capita relative to the simple average of the upper half of OECD
members can be decomposed into contributions from, respectively, hourly labour
productivity and labour utilisation (Figure 1.2, Panel A). The decomposition reveals several
different groups of countries:
●

High income/high productivity: the highest income countries (Luxembourg, Norway and the
United States in particular) typically have high productivity, although Switzerland
stands out as an exception.

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